The effectiveness of fiscal stimuli for working parents

Abstract

Child care subsidies and in-work benefits are prominent policies used to promote the labor participation of parents. We study these policies in a structural model of labor supply and child care use for couples in the Netherlands. Major reforms in family policies benefit the identification. We use differences-in-differences to assess the reliability of the model predictions. In-work benefits for secondary earners that increase with income are shown to be the most cost-effective tool for stimulating parental labor supply. Child care subsidies are less effective, as substitution of informal for formal care drives up public expenditures. We also relate our findings to related policies in the UK and US.